One discussion and 2 replies

 

Week 1 Discussion Forum

With no less than 300 words, post an initial reply to the question below   Then please respond to at least two classmates’ post with a sentence or two about their post  In most cases responding to the instructor posts will also count. Please note that you will not see your classmates’ messages until you create your initial post.

Online Forum Discussion: 

An agency relationship occurs when a principal hires an agent to perform some duty. A conflict, known as an “agency problem,” arises when there is a conflict of interest between the needs of the principal and the needs of the agent.

Discuss the possibility of agency problems in a business that is a (a) proprietorship, (b) partnership with seven partners, and (c) corporation with 100,000 stockholders.  Make you case and back up your opinions.

 Post by  

Mariscela Jaimes

 

The possibility of agency problems in a business that is:

(A) Proprietorship would be none as a sole proprietorship, also known as sole trader or individual entrepreneurship or proprietorship, is a type of enterprise that is owned and ran by one person.  There is no legal distinction between the owner and the business entity so again, no agency problem can occur.

(B) Partnership with seven partners can either cause major agency problems or very little.  It depends if the seven partners are all involved in the actual day to day decision making of the business which would have little chance to none of having agency problems.  Now if some partners are investors and others run the operation of the business then there can be agency problems.  Specifically because of some may not agree to the choices of others, there has to be a very strong partnership between these seven partners for there NOT to be major agency problems.

(C) Corporation with 100,000 stockholders would certainly have major agency problems.  The reason I think this is due to the number of employees that are stockholders, and knowing that others are running the company leaves decisions in other people’s hands.  So when you are one of those stockholders you don’t have full control of what others that run the business do that will affect the business and then your stocks.  As a stockholder you will want as much paid out (excess cash paid out in dividends) but the Sr. Leaders or others that run the company day in and day out will want to keep that excess cash to continue to grow the company.  This is referred to principal-agent problem: Occurs when one person or entity, is able to make decisions and/or take actions on behalf of, or that impact, another person or entity: the “principal”.  

References

:
Wikipedia contributors. (2020, September 12). Principal–agent problem. Retrieved October 20, 2020, from https://en.wikipedia.org/wiki/Principal%E2%80%93agent_problem

POst by   

Francisca

Villalobos  

 

Hello,

An agency problem happens when a hired manager does what is best for them instead of what is best for the shareholders or company. Managers can experience a moral dilemma about if they stick to doing what they were hired to do and do things in the best interest of the company or if they should do what is best for them. (Berk, et al., 2018, p. 13) Various issues can arise when it comes to agency problems and different types of businesses.

In a sole proprietorship, there is only 1 owner and they usually run the business. They are typically small businesses and do not have many employees. The owner has all liability for the business’s debt. (Berk, et al., 2018, p. 5) An agency problem in a sole proprietorship would be different than in a corporation or partnership because the manager would probably be dealing directly with the owner when the the agency problem occurred. If the manager were to do something that was in their own best interest instead of the best interest of the owner or the business, due to the business being small and the owner running the business I would think they would soon be aware of what the manager did. This would probably lead to a confrontation and if the manager didn’t have a good explanation (or even if they did depending on what they did), they would likely be promptly fired since the owner would be the main decision maker. If the owner were the manager then they would probably do things primarily in their own self interest, which would be to have the business be successful. However, if they did things in their own self interest that didn’t benefit the business, then it would be to their own detriment since they would be harming their own business which would not be smart.

In a partnership with seven partners, each of the partners would be an owner and they would each be liable for the company’s debts. (Berk, et al., 2018, p. 6) If an agency problem were to arise in a partnership situation, there could be a delay in the partners finding out about what the manager had done that was in their own best interest instead of the best interest of the business, as with a large number of partners, they are probably not directly involved with the day to day management. The manager could then have a chance to cover up what they did or leave the company before they found out what had occurred. There could also be a conflict between the partners about what they feel the best interest of the company is, which could make things difficult for a manager if they are given conflicting information.

In a corporation with 100,000 stockholders, there is no limit to the amount of owners a corporation can have. (Berk, et al., 2018, p. 7) The business could have 100,000 owners because they each are stock holder. As there can be so many stock holders/owners, it could be much easier for a manager to do what they feel is best for themselves instead of the business and not get caught readily if they have a high level manager position.

However, one possible solution to the agency problem is that the managers pay be tied to it’s stock price to keep them in line with doing what is best for the business, but this could back fire if they take on too much risk because of how their pay is tied to the stock prices. It could make them not want to do what is best for the company or not be able to find people to fill manager roles. (Berk, et al., 2018, p. 13) Agency problems are issues could arise in all sorts of businesses. It can be a difficult issue to manage if not handled carefully.

Thank you,

Francisca
References

Berk, J., DeMarzo, P., & Harford, J. (2018). Fundamentals of Corporate Finance 4th Edition. New York: Pearson.